From the BBC:
Bank bonuses contributed to the financial crisis but were not its main cause, head of the Financial Services Authority Lord Turner has said. The chairman of the City watchdog said there was a need to "move beyond the demonisation of overpaid traders". Instead he said "ill-designed policy" had been "a more powerful force for harm than individual greed or error"...
Lord Turner welcomed Basel III rules agreed earlier this month which force banks to increase the amount of capital they hold - including raising the core capital ratio to 7%. The rules have been designed to try to prevent a repeat of the heady credit-fuelled boom seen in the last decade.
Agreed that excessive bonuses are primarily the shareholders' problem.
But he's half wrong, of course - these ridiculously low capital ratios were a symptom of and not the cause of the 'financial crisis'.
The real cause was nothing more complicated that the fact that vast numbers of people have been tricked into believing that buying land or housing and watching its potential selling price increase could make them wealthier. Of course it is possible for small numbers of people to win out from Ponzi schemes like this, but overall we always end up worse off when the bubble bursts.
But it appears that the banks (and their bondholders) bought into the dream that the land price bubble represented real wealth and were prepared to lend ever higher amounts of money secured on it. So it's not so much that they didn't have enough 'core capital', what they had was too many liabilities ('non core capital' i.e. bonds).
In any event, the fact that banks had very low capital ratios in the past can easily be fixed retrospectively by allowing normal market forces and insolvency rules to take over, which ultimately lead to some form of debt-for-equity swap. We're not talking huge amounts either - to get from a core capital ratio of 3% to 7%, all the bank has to do is convert just over 4% of its liabilities into equity.
Does anybody have any suggestions on how we could tweak the tax system to encourage the real economy and dampen house price bubbles?
Wednesday, 22 September 2010
Lord Turner is half right
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10 comments:
The problem is that we are paying ourselves into poverty and have been doing so for decades. Wealth creation has been draining away and resurfacing eastwards where costs are lower. Where societies become successful and affluent they then become victims of their own success and the rot sets in. In the past decadence and decline has always followed with the inevitable impoverishment of those societies and more often than not never to recover again. The West is in this decline period now and it is like water running down hill impossible to reverse. You can tinker with the flow but you cannot stop it finding it,s own level. So the answer to your question "Does anybody have any suggestions on how we could tweak the tax system to encourage the real economy and dampen house price bubbles?" is no because because any solution is only going to be short term and in the long term the problem will solve itself.
Could we give existing homeowners windfall cheques when new houses a built down the road for them to stop them being such NIMBY's?
John Redwood says it will work and he's a really clever guy isn't he?
And to 'solve the problem' Turner is also advocating more of the wrong regulations that caused the crisis in the first place! Prat.
Anti, what is wrong with people in India or China becoming wealthier? It is not a negative sum game, you know. And as much as I slag off Western governments, they are infinitely preferable to what goes on in China, India, Africa, Russia, Islamic world etc.
SL, that's exactly what would happen under LVT. If a new development reduces your property value, you get a reduction in subsequent years.
L, self-serving prat as well. He's desperate to hang on to his lovely quango.
MW, nothing at all wrong with anyone becoming wealthier it is what having wealth does is the problem. Humans since time immemorial have striven to accumulate wealth and when they have a surfeit of it it destroys them. The quest should be to become wealthier but also to find a way to handle that wealth when you have it. History has taught us nobody has as yet found the answer to that conundrum. So when you rightly wail about house prices and taxes you are actually only addressing the symptoms not the cause.
Uncle Vince called them spivs and gamblers who did more damage than Bob Crow could ever imagine.
And he called for a tax emphasis on property and land which the BBC News did n't mention.What is going on? Are the Conservatives in agreement with all this?
"Agreed that excessive bonuses are primarily the shareholders' problem."
Either these bonuses are paid out of profits, in which case the government, as the major shareholder, should be able to tell the directors not to do it, as they, the shareholders, are being ripped off, as the money should be paid out in dividends, or the bonuses are a cost to the business, in which case the profits are being artificially lowered and the shareholders are being ripped off etc etc. So why doesn't the government "Just Say No"? Is it something to do with not upsetting their friends in the banking industry, I wonder?
They don't say no because politicans have no idea how to run a bank. The bankers and CEO-types they have drafted in the run UKFI call the shots and the politicans are too feeble to stand up to them.
DBC, I found it, but it would be most helpful if you could post links to these things.
B, see what SL says. I don't think there's much more to it than that.
But taking a wider view, complaining about bankers' bonuses is a bit like complaining about the fact that drug lords make so much money.
The only sensible way to deal with it is to take away the market distortions that create these opportunities - sort out credit bubbles with LVT and relaxing planning; sort out drug lords by making drugs legally available (suitably taxed and regulated, of course).
True and the politicos only have a say in two of the big four banks, but that's not to say they shouldn't make the effort.
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